31 new stocks make our Most Attractive list this month, and 23 new stocks fall onto the Most Dangerous list this month. March’s Most Attractive and Most Dangerous stocks were made available to members on March 6, 2019.

We made NVR a Long Idea on 4/17/17, and the stock has outperformed the S&P 500 since then (up 28% vs. S&P up 19%). As of March 2019, our NVR Long Idea has helped make us the #3 stock picker in Industrials per SumZero Rankings.

Since 2014, NVR has grown after-tax operating profit (NOPAT) by 25% compounded annually. Profit growth has been fueled by rising NOPAT margins, which are up from 7% in 2014 to 10% in 2018. NVR’s return on invested capital (ROIC) has also improved from 19% to 32% over the same time.

Figure 1: NVR’s Revenue & NOPAT Since 2014

Sources: New Constructs, LLC and company
filings

NVR
Valuation Provides Significant Upside

At its current price of $2,740/share, NVR has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects NVR’s NOPAT to permanently decline by 10%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 25% compounded annually over the past four years.

As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings. Below are specifics on the adjustments we make based on Robo-Analyst findings in NVR’s 2018 10-K:

Income Statement: we made $133 million of adjustments, with a net effect of removing $55 million in in non-operating income (<1% of revenue). You can see all the adjustments made to NVR’s income statement here.

Balance Sheet: we made $1.9 billion of adjustments to calculate invested capital with a net increase of $539 million. One of the largest adjustments was $396 million due to asset write-downs. This adjustment represented 22% of reported net assets. You can see all the adjustments made to NVR’s balance sheet here.

Valuation: we made $1.8 billion of adjustments with a net effect of decreasing shareholder value by $1.2 billion. The largest adjustment to shareholder value was $766 million in employee stock option (ESO) costs. This adjustment represents 8% of NVR’s market cap.

MDLZ faces many of the same challenges that recently sunk Kraft Heinz (KHC). The company is losing market share, as evidenced by the 7% compounded annual decline in revenue over the past 4 years. MDLZ has been able to offset this revenue decline with cost-cutting in the past, but its issues came to a head in 2018, when NOPAT declined by 22% and NOPAT margin fell from 18% to 14% year-over-year.

Figure 2: MDLZ Falling Profits

Sources: New Constructs, LLC and company
filings

MDLZ Provides Poor
Risk/Reward

Despite
the deterioration in fundamentals, MDLZ is up 19% so far in 2019, which has
left shares significantly overvalued.

To justify its current price of $48/share, MDLZ must maintain its 2018 NOPAT margin (14%) and grow NOPAT by 8% compounded annually. See the math behind this dynamic DCF scenario. This expectation seems lofty given MDLZ’s recent NOPAT decline and stagnant profits since 2014.

As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings. Below are specifics on the adjustments we make based on Robo-Analyst findings in MDLZ’s 2018 10-K:

Income Statement: we made 2.6 billion of adjustments, with a net effect of removing $251 million in non-operating expenses (<1% of revenue). You can see all the adjustments made to MDLZ’s income statement here.

Balance Sheet: we made $22.6 billion of adjustments to calculate invested capital with a net increase of $20.4 billion. One of the largest adjustments was $10.6 billion due to other comprehensive income. This adjustment represented 23% of reported net assets. You can see all the adjustments made to MDLZ’s balance sheet here.

Valuation: we made $25.4 billion of adjustments with a net effect of decreasing shareholder value by $24.2 billion. The largest adjustment to shareholder value was $3.3 billion in net deferred tax liabilities. This adjustment represents 5% of MDLZ’s market cap.